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Objective information about financial planning, investments, and retirement plansMon, 02 Mar 2015 22:48:37 +0000en-UShourly1http://wordpress.org/?v=3.8.5ChicagoFinancialPlannerhttps://feedburner.google.comDo I Own Too Many Mutual Funds?http://feedproxy.google.com/~r/ChicagoFinancialPlanner/~3/IxnnMBi-fRY/
http://thechicagofinancialplanner.com/2015/02/25/too-many-mutual-funds/#commentsThu, 26 Feb 2015 02:29:50 +0000http://thechicagofinancialplanner.com/?p=6732In one form or another I’ve been asked by several readers “… do I own too many mutual funds?” In several cases the question was prompted by the number of mutual fund holdings in brokerage accounts with major brokerage firms including brokerage wrap accounts. One reader cited an account with $1.5 million and 35 mutual […]

In one form or another I’ve been asked by several readers “… do I own too many mutual funds?” In several cases the question was prompted by the number of mutual fund holdings in brokerage accounts with major brokerage firms including brokerage wrap accounts. One reader cited an account with $1.5 million and 35 mutual funds.

So how many mutual funds are too many? There is not a single right answer but let’s try to help you determine the best answer for your situation.

The 3 mutual fund portfolio

I would contend that a portfolio consisting of three mutual funds or ETFs could be well-diversified. For example a portfolio consisting of the Vanguard Total Stock Market Index (VTSMX), the Vanguard Total International Stock Index (VGTSX) and the Vanguard Total Bond Index (VBMFX) would provide an investor with exposure to the U.S. stock and bond markets as well as non-U.S. developed and emerging markets equities.

As index funds the expenses are low and each fund will stay true to its investment style. This portfolio could be replicated with lower cost share classes at Vanguard or Fidelity if you meet the minimum investment levels. A very similar portfolio could also be constructed with ETFs as well.

This isn’t to say that three index funds or ETFs is the right number. There may be some additional asset classes that are appropriate for your situation and certainly well-chosen actively managed mutual funds can be a fit as well.

19 mutual funds and little diversification

A number of years ago a client engaged my services to review their portfolio. The client was certain that their portfolio was well-diversified as he held several individual stocks and 19 mutual funds.

After the review, I pointed out that there were several stocks that were among the top five holdings in all 19 funds and the level of stock overlap was quite heavy. These 19 mutual funds all held similar stocks and had the same investment objective. While this client held a number of different mutual funds he certainly was not diversified. This one-time engagement ended just prior to the Dot Com market decline that began in 2000, assuming that his portfolio stayed as it was I suspect he suffered substantial losses during that market decline.

How many mutual funds can you monitor?

Can you effectively monitor 20, 30 or more mutual fund holdings? Frankly this is a chore for financial professionals with all of the right tools. As an individual investor is this something that you want to tackle? Is this a good use of your time? Will all of these extra funds add any value to your portfolio?

What is the motivation for your broker?

If you are investing via a brokerage firm or any financial advisor who suggests what seems like an excessive number of mutual funds for your account you should ask them what is behind these recommendations. Do they earn compensation via the mutual funds they suggest for your portfolio? Their firm might have a revenue-generating agreement with certain fund companies. Additionally the rep might be required to use many of the proprietary mutual funds offered by his or her employer.

Circumstances will vary

If you have an IRA, a taxable brokerage account and a 401(k) it’s easy to accumulate a sizable collection of mutual funds. Add in additional accounts for your spouse and the number of mutual funds can get even larger.

The point here is to keep the number of funds reasonable and manageable. Your choices in your employer’s retirement plan are beyond your control and you may not be able to sync them up with your core portfolio held outside of the plan.

Additionally this is a good reason to stay on top of old 401(k) plans and consolidate them into an IRA or a new employer’s plan when possible.

The Bottom Line

Mutual funds remain the investment of choice for many investors. It is possible to construct a diversified portfolio using just a few mutual funds or ETFs.

Holding too many mutual funds can make it difficult to monitor and evaluate your funds as well as your overall portfolio.

]]>http://thechicagofinancialplanner.com/2015/02/25/too-many-mutual-funds/feed/7http://thechicagofinancialplanner.com/2015/02/25/too-many-mutual-funds/What is a Hedge Fund?http://feedproxy.google.com/~r/ChicagoFinancialPlanner/~3/UXo5tlziHcU/
http://thechicagofinancialplanner.com/2015/02/17/hedge-fund/#commentsTue, 17 Feb 2015 14:17:49 +0000http://thechicagofinancialplanner.com/?p=6702The term hedge fund is used often in the financial press. I suspect, however, that many investors do not really know what a hedge fund is. Investopedia defines a hedge fund as follows: “An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative […]

The term hedge fund is used often in the financial press. I suspect, however, that many investors do not really know what a hedge fund is.

Investopedia defines a hedge fund as follows:

“An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).”

Here are a few basics about hedge funds to help you understand them. Note this is certainly not meant to be an in-depth tutorial but rather is meant to provide an introduction to hedge funds.

Who can invest in hedge funds?

In order to invest in a hedge fund you must be an accredited investor. The current definition of an accredited investor is someone with a net worth of $1 million (excluding the equity in their home) and at least $200,000 in income ($300,000 with a spouse) over the past two years. Many hedge fund investors are institutional investors such as foundations, endowments and pension plans. About 65 percent of the capital invested in hedge funds comes from institutional investors.

What is the minimum investment?

The minimum required to invest is often $1 million or more though some smaller hedge funds and funds of funds may have lower minimums. New companies like Sliced Investing are seeking to change these high minimums by allowing investors to invest as little as $20,000.

Do I have access to my money?

Some hedge funds allow investors to subscribe (invest) or redeem their money monthly, for others this might be quarterly or based upon some other time period. Most hedge funds will require advanced notice for redemptions which might be as long as 180 days. This allows the fund managers time to raise sufficient cash and allows for an orderly sale of fund investments especially if the redemption is a significant amount.

Some hedge funds also require a lock-up which means that there are no redemptions allowed during this initial period. A typical lock-up period is one year, though some are as long as two years. In some cases the lock-up period is “soft” meaning that redemption can be made but there will often be a penalty ranging from 2 percent to as high as 10 percent.

Some hedge funds may also have the ability to enforce “gates” on redemptions which means they can decide to process only a portion of the redemptions requested. This provision came into focus during the 2008-2009 market downturn as hedge fund redemptions requests swelled as many investors sought to raise cash.

What types of fees are charged?

The fees charged by hedge funds vary widely.

Many hedge funds charge a management fee of 2 percent or more.

There might also be incentive fees of 10 to 20 percent of the fund’s profits or more. This rewards the fund manager for superior performance. The flip side of this is that the manager generally only collects an incentive fee if the fund’s performance exceeds its former highs, known as a high water mark.

If a fund loses 5 percent in a given year, no incentive fees will be paid to the manager the following year until the 5 percent loss is made up.

The term two and 20 is a common one in the hedge fund world meaning that the fund would charge a 2 percent management fee and a 20 percent incentive fee. This may seem pricey but if the performance is stellar then investors won’t mind paying it.

What types of investment strategies are available?

There is a vast range of investment strategies across the hedge fund landscape. These might include long-short, global macro, market neutral, convertible arbitrage, distressed securities and many others. Additionally there are a number of fund of funds offered which means that the fund offers a collection of strategies and fund managers under one umbrella.

What should I consider before investing in a hedge fund?

From reading the above you might ask yourself why would I invest in hedge funds? Let’s remember that hedge funds are considered alternative investments. Ideally they will have a relatively low correlation to the traditional long-only equity and fixed income investments in your portfolio. At their best well-managed hedge funds can add balance and reduce the overall risk of your portfolio, in some cases the strategies are designed to provide absolute returns across all investing environments.

Before investing in a hedge fund or any alternative investment make sure you have considered and fully understand the following:

The fund’s investment strategy.

How this investment strategy fits with your overall portfolio and investing strategy.

What the fund “brings to the table” that you can’t get with more traditional long-only stock and bond investments.

Who is managing the fund and their history and investment track record.

The required minimum investment.

Any redemption restrictions and/or lock-up periods. Make sure that you won’t need to tap this money during this time period.

The Bottom Line

Like any investment option you might consider it is important to understand the pros and cons of hedge funds in general and any specific fund or strategy that you might be considering for your portfolio.

Disclosure: This blog post was written for Sliced Investing pursuant to a paid content arrangement I have with the company’s representatives as part of an effort to raise awareness about alternative investment options. All views expressed are entirely my own, and were not influenced or directed by Sliced Investing.

]]>http://thechicagofinancialplanner.com/2015/02/17/hedge-fund/feed/2http://thechicagofinancialplanner.com/2015/02/17/hedge-fund/What I’m Reading – Winter Chill Editionhttp://feedproxy.google.com/~r/ChicagoFinancialPlanner/~3/L3tunQXa_ds/
http://thechicagofinancialplanner.com/2015/02/14/reading-winter-chill-edition/#commentsSat, 14 Feb 2015 14:00:41 +0000http://thechicagofinancialplanner.com/?p=6693It’s Valentine’s Day this weekend and it’s really cold out. For the next week we are supposed to be in the “deep freeze” so to speak. Our friends in the Boston area are supposed to get slammed with even more snow. We will be spending Valentine’s Day inside, I’m making shrimp scampi for dinner and […]

It’s Valentine’s Day this weekend and it’s really cold out. For the next week we are supposed to be in the “deep freeze” so to speak. Our friends in the Boston area are supposed to get slammed with even more snow. We will be spending Valentine’s Day inside, I’m making shrimp scampi for dinner and I made sure that we had appropriate sweets and some bubbly to celebrate as well.

Here are a few financial articles I suggest for some good financial reading this weekend:

]]>http://thechicagofinancialplanner.com/2015/02/14/reading-winter-chill-edition/feed/0http://thechicagofinancialplanner.com/2015/02/14/reading-winter-chill-edition/IRA Contribution Guide for Tax Year 2014 – An Illustrationhttp://feedproxy.google.com/~r/ChicagoFinancialPlanner/~3/PEcubWOHTns/
http://thechicagofinancialplanner.com/2015/02/08/ira-contribution-guide-2014/#commentsMon, 09 Feb 2015 00:27:13 +0000http://thechicagofinancialplanner.com/?p=6677IRA season is in full swing. For the next couple of months you will be inundated with ads telling you why you should contribute to an IRA for the 2014 tax year and why you should do it with the advertiser. You’ll see and hear terms like Traditional IRA, Roth IRA, SEP-IRA and SIMPLE IRA. If […]

IRA season is in full swing. For the next couple of months you will be inundated with ads telling you why you should contribute to an IRA for the 2014 tax year and why you should do it with the advertiser.

You’ll see and hear terms like Traditional IRA, Roth IRA, SEP-IRA and SIMPLE IRA. If you are not familiar with them, these various types of IRA accounts can get confusing.

Once again this year the folks at IRA Success created this wonderful infographic. Whether you are an individual looking to fund an IRA account for yourself (Roth or Traditional IRA) or a small business person looking for retirement account (SIMPLE IRA or SEP-IRA) this infographic provides an excellent IRA contribution guide for 2014 contributions that can still be made in 2015. The deadline dates will vary so be sure to consult your tax or financial advisor.

If you haven’t yet opened and/or funded an IRA or self-employed or small business retirement plan for tax year 2014 the information above is a good reference. If you are already looking towards your retirement account contributions for 2015 note that some of the contribution limits have changed.

Please feel free to contact me with your questions on IRAs and small business retirement plans. Please check out our Resources page for more tools and services that you might find useful.

]]>http://thechicagofinancialplanner.com/2015/02/08/ira-contribution-guide-2014/feed/1http://thechicagofinancialplanner.com/2015/02/08/ira-contribution-guide-2014/Why Using Home Equity to Invest in the Stock Market is a Bad Ideahttp://feedproxy.google.com/~r/ChicagoFinancialPlanner/~3/yDjOrvIJkak/
http://thechicagofinancialplanner.com/2015/02/04/using-home-equity-invest-stock-market-bad-idea/#commentsThu, 05 Feb 2015 02:14:14 +0000http://thechicagofinancialplanner.com/?p=6651Not that I needed one but an email newsletter that I received from attorney Dale Ledbetter recently served as an excellent reminder what a poor idea using home equity to invest in stocks really is. From his email: “Strong stock market encourages the resurrection of a bad practice – borrowing money against the value of […]

Not that I needed one but an email newsletter that I received from attorney Dale Ledbetter recently served as an excellent reminder what a poor idea using home equity to invest in stocks really is. From his email:

“Strong stock market encourages the resurrection of a bad practice – borrowing money against the value of your home to play the market. The horror story set out below is likely to be repeated if these practices continue.

A married couple, both of whom were in their late 80s, was persuaded by their bank to take out 100% value equity line of credit against their home. They were then persuaded to turn these “borrowed assets” over to the bank’s securities subsidiary where they were told the return would easily exceed the cost of the credit line.

The broker then advised the couple to put 95% of the total proceeds into a single stock. The securities account tanked, resulting in an almost 100% loss. In the meantime, the house dropped in value by $100,000, resulting in a foreclosure proceeding. The bank then refused to permit a $150,000 short sale to bona fide buyers.

The husband died. The wife, who now lives in a constant care facility, is entering bankruptcy to force the bank to take the house.

Of course, the bank and their securities subsidiary blame it all on the elderly couple who they described as “sophisticated investors.” Both husband and wife had been schoolteachers and had no training or experience in the securities industry or in investment strategies. The fact that both were in their late 80s and suffering from diminished capacity, was not enough to deter the aggressive sales tactics of their “trusted advisors.”

Aside from what would seem to be blatant investment fraud on the part of the bank and their advisory unit, this piece reiterates why using your home equity to invest in the stock market is such a bad idea. Here are a few specific reasons that I discourage this practice.

Did you really forget the 2008 housing market crash this soon?

For those with short memories an overinflated housing market crashed and triggered a meltdown in the economy and drastically reduced the value of many homes. We are still recovering from this and although home values have improved in many parts of the country we learned that home prices will not always go up and that real estate is not the safe store of value we were led to believe.

To put this another way let’s say you tap your home equity to invest in the stock market. What if the value of your home decreases 10 percent, 20 percent or more? Now you have to pay back that home equity loan on a house that isn’t worth nearly as much as when you took out the loan. You could find yourself underwater on your home or worse in foreclosure. You could also find that your plans to fund a comfortable retirement or your children’s college education are out the window.

What if your investments tank?

Much like these poor folks in Mr. Ledbetter’s example above, not all investments are a sure thing. What happens if you borrow against your home equity to invest in the stock market and things don’t work out? If the specific investments you or someone else chose drop in value you are now stuck with investments worth less than your original investment and you will be stuck paying off the loan which is still based upon the amount borrowed.

Even if you went with a few index funds and the stock market drops you will find yourself in the same boat. Again this is a great strategy to ruin your otherwise well-planned financial future.

Who exactly is suggesting this idea?

Like the poor folks in Mr. Ledbetter’s example take a look at anyone suggesting this idea to you with a very jaundiced eye. What is in it for them? Are you the only one with any real skin in the game?

In the example above the bank won at last twice. They got the interest on the loan and their brokerage unit made money via fees and perhaps other sources on the investment side. They had no skin in the game and will likely come out whole even after the foreclosure.

The Bottom Line

Generally, in my opinion, anyone who would suggest this idea to an investor is motivated by greed and does not have the best interests of their clients at heart. Using your home’s equity to invest in the stock market is just not a sound idea.

There might be instances where tapping home equity to invest can be a good idea, but these are very limited and should only be undertaken by truly sophisticated investors who fully understand the risks involved.

]]>http://thechicagofinancialplanner.com/2015/02/04/using-home-equity-invest-stock-market-bad-idea/feed/2http://thechicagofinancialplanner.com/2015/02/04/using-home-equity-invest-stock-market-bad-idea/My Top 10 Most Read Posts of January 2015http://feedproxy.google.com/~r/ChicagoFinancialPlanner/~3/cZT3q7Otly8/
http://thechicagofinancialplanner.com/2015/02/02/top-posts-january-2015/#commentsMon, 02 Feb 2015 21:24:45 +0000http://thechicagofinancialplanner.com/?p=6640The first month of 2015 is in the books and yesterday’s Super Bowl was an exciting one. As a Packer fan I have to wonder if they hadn’t blown the NFC Championship game would they have been able to beat the Patriots for the second time this season? Oh well, time to wait for next […]

The first month of 2015 is in the books and yesterday’s Super Bowl was an exciting one. As a Packer fan I have to wonder if they hadn’t blown the NFC Championship game would they have been able to beat the Patriots for the second time this season? Oh well, time to wait for next season.

Readership here at The Chicago Financial Plannercontinues to increase and for that I thank you my readers. My hope is that some of the articles, whether written by me or by some of the excellent guest authors who have contributed their insights over the past few years, have been useful and informative to you.

For this sports addict this is “no man’s land” in terms of sports on TV. There’s another month until college basketball gets interesting and the college football season doesn’t start until late August. If you are like me this is a good time to catch-up on some personal finance reading. In that vein here are my top 10 most read posts during January of 2015:

Related Posts:

]]>http://thechicagofinancialplanner.com/2015/02/02/top-posts-january-2015/feed/0http://thechicagofinancialplanner.com/2015/02/02/top-posts-january-2015/7 Tips to Become a 401(k) Millionairehttp://feedproxy.google.com/~r/ChicagoFinancialPlanner/~3/-LZV_VjvCsI/
http://thechicagofinancialplanner.com/2015/01/29/401k-millionaire/#commentsThu, 29 Jan 2015 22:31:54 +0000http://thechicagofinancialplanner.com/?p=6623According to Fidelity, the average balance of 401(k) plan participants grew to a record high of $91,300 at the end of 2014. This data is from plans using the Fidelity platform. According to Fidelity about 72,000 participants had a balance of $1 million which is about double the number at the end of 2012 and […]

According to Fidelity, the average balance of 401(k) plan participants grew to a record high of $91,300 at the end of 2014. This data is from plans using the Fidelity platform.

According to Fidelity about 72,000 participants had a balance of $1 million which is about double the number at the end of 2012 and about 5 times the number at the end of 2008. What their secret? Here are 7 tips to become a 401(k) millionaire or to at least maximize the value of your 401(k) account.

Be consistent and persistent

Investing in your 401(k) plan is more of a marathon than a sprint. Maintain and increase your salary deferrals in good markets and bad.

Contribute enough

In an ideal world every 401(k) investor would max out their annual salary deferrals to their plan which are currently $18,000 and $24,000 for those who are 50 or over. If you are just turning 50 this year or if you are older be sure to take advantage of the $6,000 catch-up contribution that is available to you. Even if you plan limits the amount that you can contribute because of testing or other issues this catch-up amount is not impacted. It is also not automatic so be sure to let your plan administrator know that you want to contribute at that level.

According to the Fidelity study the average contribution rate for those with a $1 million balance was 16 percent, while the average contribution across all 401(k) investors they surveyed was about 8 percent. The 16 percent contribution rate translated to a bit over $21,000 for the millionaire group.

As I’ve said in past 401(k) posts on this site it is important to contribute as much as you can. If you can only afford to defer 3 percent this year, that’s a start. Next year try to hit 4 percent or more. As a general rule it is a good goal to contribute at least enough to earn the full matching if your employer offers one.

Take appropriate risks

As with any sort of investment account be sure that you are investing in accordance with your financial plan, your age and your risk tolerance. I can’t tell you how many times I’ve seen lists of plan participants and see participants in their 20s with all or a large percentage of their account in the plan’s money market or stable value option.

Your account can’t grow if you don’t take some risk.

Don’t assume Target Date Funds are the answer

Target Date Funds are big business for the mutual fund companies offering them. They also represent a “safe harbor” from liability for your employer. I’m not saying they are a bad option but I’m also not saying they are the best option for you.

I like TDFs for younger investors say those in their 20s who may not have other investments outside of the plan. The TDF offers an instant diversified portfolio for them.

Once you’ve been working for a while you should have some outside investments. By the time you are say in your 40s you should consider a more tailored portfolio that fits you overall situation.

Additionally Target Date Funds all have a glide path into retirement. They are all a bit different, you need to understand if the glide path offered by the TDF family in your plan is right for you.

Invest during a long bull market

This is a bit sarcastic but the bull market for stocks that started in March of 2009 is in part why we’ve seen a surge in 401(k) millionaires and in 401(k) balances in general. The equity allocations of 401(k) portfolios have driven the values higher.

The flip side are those who swore off stocks at the depths of the 2008-2009 market downturn have missed one of the better opportunities in history to increase their 401(k) balance and their overall retirement nest egg.

Don’t fumble the ball before crossing the goal line

We’ve all seen those “hotdogs” running for a sure touchdown only to spike the ball in celebration before crossing the goal line.

The 401(k) equivalent of this is to just let your account run in a bull market like this one and not rebalance it back to your target allocation. If your target is 60 percent in stocks and it’s grown to 80 percent in equities due to the run up of the past few years you might well be a 401(k) millionaire.

It is just as likely that you may become a former 401(k) millionaire if you don’t rebalance. The stock market has a funny way of punishing investors who are too aggressive or who don’t manage their investments.

Pay attention to those old 401(k) accounts

Whether becoming a 401(k) millionaire in your current 401(k) account or combined across several accounts the points mentioned above still apply. In addition it is important to be proactive with your 401(k) account when you leave a job. Whether you roll the account over to an IRA, leave it in the old plan or roll it to a new employer’s plan if allowed do something, make a decision. Leaving an old 401(k) account unattended is wasting this money and can be a huge detriment to your retirement savings efforts.

The Bottom Line

Whether or not you actually amass $1 million in your 401(k) or not the goal is to maximize the amount accumulated there for retirement. The steps outlined above can help you to do this. Are you ready to start down the path of becoming a 401(k) millionaire?

]]>http://thechicagofinancialplanner.com/2015/01/29/401k-millionaire/feed/12http://thechicagofinancialplanner.com/2015/01/29/401k-millionaire/Robo Advisors – A Brave New World?http://feedproxy.google.com/~r/ChicagoFinancialPlanner/~3/P6fiCg4AF9s/
http://thechicagofinancialplanner.com/2015/01/24/robo-advisors-brave-new-world/#commentsSat, 24 Jan 2015 17:25:43 +0000http://thechicagofinancialplanner.com/?p=6595The piece below is written by Doug Dahmer and originally appeared under the title “Robo-Advisors” – rise of the machines on Jon Chevreau’s site Financial Independence Hub. Jon is at the forefront of a movement he calls “Findependence.” This is essentially looking at becoming financially independent so that you can pursue the lifestyle of your […]

The piece below is written by Doug Dahmer and originally appeared under the title “Robo-Advisors” – rise of the machines on Jon Chevreau’s site Financial Independence Hub. Jon is at the forefront of a movement he calls “Findependence.” This is essentially looking at becoming financially independent so that you can pursue the lifestyle of your choosing. Jon is a Canadian author and journalist, check out his book Findependence Day. Jon has contributed several prior posts here as well.

I know Isaac Asimov’s Three Laws of Robotics, I read Arthur C. Clarke’s 2001: A Space Odyssey and I love the Terminator movies (I’ll be back!).

From all this I know three things: Robots are very smart. Robots always start off to help you. Robots have a tendency to turn on you.

One of the newest crazes and buzzwords in personal finance is: “Robo-Adviser.” If you’re not familiar with the term, it refers to investment management by algorithm in the absence of human input.

With a “Robo” you are asked to complete an on-line risk assessment questionnaire. Your responses determines the prescribed portfolio of ETFs (Exchange-Traded Funds) with a built-in asset allocation best suited to your needs. Once a year the portfolio is rebalanced to this prescribed asset allocation recipe.

Dynamics change as shift from Saving to Spending

The “Robo” approach relies heavily upon a basic “buy/hold/rebalance” investment strategy. This passive strategy can work to your advantage during your accumulation years. These are the years when time is your friend, and dollar cost averaging through market cycles offers the opportunity to give your returns a boost.

However, as we get older and begin to prepare for and transition into our spending years, things change. Unfortunately, too few people realize that the investment strategies that served us well during our savings years turn on their head and work to our disadvantage as the flow of funds reverses and savings turns to spending.

Dollar Cost Ravaging

Suddenly time changes from friend to foe where “dollar cost averaging” turns to “dollar cost ravaging” or what we call, the Mathematics of Catastrophe. (More about which in our next Hub blog). During the second half of your life the simplistic money management approach followed by “Robo- Advisers” can start to look like a “deed of the devil.”

Another concern is that “Robos” are unable to deal with the reality of expense variability. If you believe that in retirement, a fixed, annual withdrawal rate from a diversified portfolio will address your income needs I can with confidence suggest you are at best short-changing yourself and at worst setting yourself up for a cataclysmic financial failure.

I have been in this business a long time and know beyond a shadow of a doubt that a properly constructed life plan is very important in the second half of your life. It is only when you know what you want to do, when you want to do it and what it will cost to do it, that you can start to build the financial framework to make it happen.

Only through your life plan are you able to anticipate years of surplus and years of deficits and take the steps to bend them to your benefit. You need to bring together cash flow optimization, tax management and pension style investment management to make it happen and in the process add hundreds of thousands of dollars to your lifetime assets and cash flow.

Robos ill equipped to link life to investment plan

Linking your life plan to your investment plan is the secret to success, but “robo investing” is not equipped to handle the nuances of that linkage. A Retirement Income Specialist knows that the type of money management you need is much more complex where the cash-flow demands outlined in your life plan need are linked to your investment plan. Tax planning, income optimization and risk mitigation means it is dangerous to leave your investment management running on auto-pilot.

Isaac Asimov’s first law of robotics holds that: A robot may not injure a human being or, through inaction, allow a human being to come to harm.

“Robo-adviser” firms would do well to review this law. When it comes to investors heading into the second half of their lives, “Robo Advisers” may well be about to break it.

Doug Dahmer, CFP, is founder and CEO ofEmeritus Retirement Income Specialists. With offices in Toronto and Burlington, Emeritus’ C3 process is one of the industry’s most comprehensive retirement planning processes.

Online financial advisors or Robo Advisors are popping up all over the place and if you believe the financial press they are the future of financial advice. In part I believe they are or will at least shape the future of financial advice. I weighed in on this topic recently viaIs An Online Financial Advisor Right For You? for Investopedia.

Check out an online service like Personal Capital to manage all of your investment and retirement accounts all in one place. Please check out our Resources page for more tools and services that you might find useful.

]]>http://thechicagofinancialplanner.com/2015/01/24/robo-advisors-brave-new-world/feed/1http://thechicagofinancialplanner.com/2015/01/24/robo-advisors-brave-new-world/Managing Inflation in Retirementhttp://feedproxy.google.com/~r/ChicagoFinancialPlanner/~3/oM-5SI6gMRI/
http://thechicagofinancialplanner.com/2015/01/20/managing-inflation-retirement/#commentsWed, 21 Jan 2015 04:13:23 +0000http://thechicagofinancialplanner.com/?p=6532Inflation may seem like a tame or even non-existent threat. We are actually witnessing deflation in the price of oil and other commodities as I write this. Even so, it’s highly unlikely that inflation is dead. The U.S. economy continues to recover from the financial crises and times of economic recovery are often a trigger […]

Inflation may seem like a tame or even non-existent threat. We are actually witnessing deflation in the price of oil and other commodities as I write this. Even so, it’s highly unlikely that inflation is dead. The U.S. economy continues to recover from the financial crises and times of economic recovery are often a trigger for higher inflation.

An annual inflation rate of 2 percent or 3 percent over a period of years can seriously erode the purchasing power of your retirement nest egg. At 2.5 percent inflation, $1 today will be worth approximately 78 cents in 10 years, 61 cents in 20 years, and 48 cents in 30 years. This could have a major impact on those entering retirement and those in retirement.

Managing inflation in retirement is crucial, here are some thoughts you need to consider.

Manage all of your retirement resources

Most people have multiple sources of retirement income which might include:

It is important to identify all of these financial resources and to manage them in a fashion to maximize their benefit to your retirement.

Use a conservative inflation rate for planning purposes

Since your retirement is likely to span decades, consider inflation over long time periods. Currently inflation is running at historically low levels, under 1 percent by some measures. However since World War II inflation has averaged well over 3 percent. Inflation will have a huge impact on your retirement finances, assuming today’s low inflation rate into retirement could be setting you up for disappointment down the road.

Invest to stay ahead of inflation

Your investments should be diversified among various asset classes based upon your risk tolerance, your income needs, your age, etc. That said don’t be too conservative. While it might be tempting to shy away from risk in retirement, especially given the financial crisis of 2008-2009, I always caution retirees that their greatest risk is outliving their money. Being too conservative can easily lead to this. Likely a portion of your portfolio should remain invested in stocks, which have typically earned returns in excess of inflation over time.

Make good pension decisions

If you are covered by a pension plan you might likely have options as to whether you want to take your benefit as an annuitized series of monthly payments over your lifetime or as a lump-sum payment. Either option can be the right choice depending upon your situation. Most corporate pension plans do not offer cost of living increases so your monthly payments will lose value over time in real terms due to inflation. On the other hand, most public and municipal pensions do have cost of living adjustments, though there is no guarantee that future increases will keep pace with actual rate of inflation.

Taking a lump-sum distribution and rolling it over to an IRA assumes that you are comfortable managing and investing this money on your own or that you have a relationship with a financial adviser to help you do it. A properly invested portfolio has the potential to earn enough to keep you ahead of inflation. On the flip side, it’s important to remember that investments can lose money as well.

Make sound Social Security decisions

You are eligible to begin collecting Social Security benefits at age 62. If you opt to take benefits that early your monthly payment will be permanently reduced. If you wait until your full retirement age, generally 66 for most people, your monthly benefit will be 33 percent higher. If you are able to wait until age 70 your monthly payment amount will be another 35 percent higher.

The increases are also prorated, so if you were to commence benefits at say age 65 your benefit would be proportionally higher than at age 62. Waiting longer also increases the size of your cost of living increases as these will be based upon the higher starting benefit amount.

Reduce your fixed expenses

For many entering retirement their biggest fixed expense might be their mortgage. If your mortgage payment is affordable, if you have a large nest egg and perhaps will be receiving a pension then perhaps having a mortgage in retirement will not pose a financial hardship. At the very least make sure that your housing costs are affordable. If they are not maybe this is the time to downsize.

Prior to retirement is a good time to look at your monthly expenses. Where can you cut back without reducing your quality of life? Do you still need all of those cable channels your kids used to watch when they lived at home? Can you adjust your cell phone plan? Do you need that second car? The point is that the leaner your monthly expenses are entering retirement the better able you will be able to cope with the impact of inflation or other unplanned expenses that can arise.

Plan for healthcare costs

Health-care costs have tended to increase faster than overall rate of inflation. It is crucial that retirees factor in the cost of healthcare into their retirement budget. While Medicare will help once you turn age 65, it still does not cover everything. The cost of healthcare in retirement is often cited as an item that becomes the budget-buster for many retirees Look into supplemental policies and prescription coverage to help with those non-covered expenditures, especially if your employer does not provide health insurance after retirement.

It is incumbent upon pre-retirees to save enough to cover their healthcare in retirement. If your health insurance plan is a high-deductible plan with access to an HSA I urge you to take advantage of this opportunity. Salt away as much as you are allowed and if possible cover your deductibles and out-of-pocket costs from other sources while you are working. Let the HSA grow and then use these funds to cover Medicare supplement insurance and other healthcare costs in retirement.

Plan for your long-term care needs

Very much related to the cost of healthcare in retirement is the cost of long-term care if needed. Costs will vary based upon where you live, whether you are in a facility or receive care at home and a multitude of factors. Long-term care insurance is one way to offset some or all of these potential costs. LTC insurance can be quite expensive and only gets more expensive the older you get. Insurance is often cited as most appropriate for those in the middle in terms of net worth. The poor can often rely on Medicaid and the rich can self-fund this expense.

The right answer will depend upon what you can afford in terms of premiums and how much of your savings you are willing to spend on this cost. The bottom line here is that you need to assume you will need long-term care at some point and have a plan to fund these costs. No surprise these costs are increasing and will be a source of retirement inflation if you need this type of care.

Invest in tax-advantaged investment vehicles while you are working

Utilize your employer’s 401(k) plan or similar plans such as a 403(b) or 457. Contribute to an IRA. If you are self-employed start and fund a self-employed retirement plan such as a Solo 401(k), a SEP-IRA or other plan. Since you aren’t paying income taxes on earnings throughout the years, that typically means you’ll have a larger balance at retirement than if you were paying taxes throughout the years. Thus, you’ll start out with a larger retirement base to help combat inflation’s effects. If some of this money is in a Roth IRA or Roth 401(k) withdrawals are tax-free to boot.

Minimize withdrawals especially during the early years of retirement

To counter inflation, you will need to withdraw larger and larger sums just to maintain the same purchasing power. To make sure you don’t run out of funds late in life, keep withdrawals during the early years to a minimum. Conventional wisdom in the financial planning world says that 3%-4% can generally be withdrawn each year.

The reality is this is at best only a rule of thumb. The amount you spend in retirement will likely not be linear and will evolve over the course of your retirement. For example travel and other aspects of an active lifestyle might be more prevalent early in your retirement. Depending upon your health, the cost of medical care might increase during the later years of retirement. Minimizing your withdrawals from retirement accounts during the early years of retirement can help ensure that the funds you need will be there later on into retirement as specific costs increase and to combat the general impact of inflation.

Work in retirement

For some the best way to make sure they are protected from inflation is to work a bit longer or to work at least part-time for a few years into retirement. This will add to your spendable cash flow and lower the amount you need to take from savings for a few years; both can help your combat inflation during retirement.

Be prepared for change

Things will change during the course of your retirement. You need to manage the financial aspects of your retirement. Watch your withdrawals, manage your investment allocation and monitor your spending. Be prepared for the unexpected including changes in your health.

The Bottom Line

Inflation is the worst enemy of retirees, it should be feared far more than any potential for investment loss. Not preparing for inflation in retirement can cause you to run out of money at a time of life when this situation is hard to rectify. The fact that many retirees are on fixed incomes either in total or in part makes them susceptible to the ravages of inflation. Managing inflation in retirement should be a top priority for all retirees.

Managing your investments and spending to minimize the impact of inflation will go a long ways toward ensuring a financially successful retirement, as will saving and investing as much as you can during your working years.

]]>http://thechicagofinancialplanner.com/2015/01/20/managing-inflation-retirement/feed/0http://thechicagofinancialplanner.com/2015/01/20/managing-inflation-retirement/What I’m Reading NFL Conference Championship Editionhttp://feedproxy.google.com/~r/ChicagoFinancialPlanner/~3/cLKAS2otW_g/
http://thechicagofinancialplanner.com/2015/01/17/what-im-reading-nfl-conference-championship-edition/#commentsSat, 17 Jan 2015 14:45:54 +0000http://thechicagofinancialplanner.com/?p=6464Its conference championship weekend in the NFL. The winners of the two games on Sunday will play in two weeks in the Super Bowl. The Indianapolis Colts play the New England Patriots in the late game. The first game has my beloved Green Bay Packers visiting the defending champs the Seattle Seahawks. A tough place […]

Its conference championship weekend in the NFL. The winners of the two games on Sunday will play in two weeks in the Super Bowl. The Indianapolis Colts play the New England Patriots in the late game. The first game has my beloved Green Bay Packers visiting the defending champs the Seattle Seahawks. A tough place to win so I’m hoping Aaron Rodgers and the rest of the team are up to the task.

While you are waiting for the game or if you are not into football here are a few financial articles I suggest for some good weekend financial reading: